Help! I want to retire but I haven’t paid off my mortgage

We all want to pay off our mortgages as soon as we can and certainly before we retire and stop earning. However, for growing numbers of borrowers that won’t be a reality.

People are taking longer to get on to the property ladder, plus lifestyle changes, including divorce, mean more people need to keep their loan going for longer. Others may have taken out an interest-only mortgage and now don’t have enough savings to repay their outstanding loan.

Borrowing in your 50s or older hasn’t always been straightforward, with age and security of income not always in your favour. However, as demand grows, more lenders are recognising the need for a more flexible approach.

Age matters

Lenders would often refuse to give a new mortgage to anyone aged over 65. But, in recent years, many have increased their maximum lending ages.

With life expectancy rising and more people working longer, banks, and more commonly building societies, have recognised that previous cut-off ages are outdated. Even where borrowers have retired, many will still have sufficient income to repay a mortgage.

“Larger high-street lenders have extended criteria to accommodate a broader range of homeowners,” says David Hollingworth, associate director of communications at mortgage broker London & Country (L&C) Mortgages. “Halifax now lends up to the age of 80 and Nationwide lends up to age 85 for borrowers who are already retired.

“However, it’s still the smaller mutual lenders, such as Family Building Society, and specialist lenders, such as Hodge Lifetime, that can lend into a borrower’s 90s. Aldermore allows homeowners to hold one of its mortgages until they are 99. The maximum age new borrowers can apply for a mortgage is 85.”

The Family Building Society takes a common-sense approach to lending. It will consider earned income up to age 70 and has recently extended the maximum age at the end of the mortgage to 95. Meanwhile, Hodge Lifetime offers a 55+ Mortgage which is a fixed-term interest only loan. Anyone aged 55 to 85 can apply and it runs to a maximum age of 95.

Peter Fowler and his civil partner, Chris Beer were facing having to sell their home when their bank refused to lend to them into retirement.

The couple have lived in their three-storey, five-bedroom Victorian home in Cardiff for 14 years. They spent years renovating it and it’s in an area of the Welsh capital they love.

Peter, a retired lecturer, and Chris, who still works as a benefits adviser and software specialist, had an interest-only mortgage with a high-street bank. Around 18 months ago, it came to the end of its term and the bank demanded the balance – around £350,000 – to be paid.

“We spoke to our bank,” says Peter, 68, “We explained we wanted to stay in our home and that we could pay off some of the balance with the proceeds of a buy-to-let property we owned. But it was formulaic in its approach and simply told us it had no product that met our needs.”

Resigned to moving, the pair planned to sell their home to repay the loan and relocate to their rental property.

“We didn’t think we had much choice until a friend put us in touch with their mortgage broker who managed to help,” says Peter.

The broker, Nigel Grice Associates in Oxford, found them a mortgage with Family Building Society that enabled them to stay in their own home. Peter and Chris signed up to a three-year discount at 3.09% with a 17-year term.

Peter says: “It was such a huge relief we didn’t have to move. We sold the other house and took out a mortgage for £150,000 on a loan that expires when we’re in our 80s.”

Should you raid your pension?

For those who only have a small outstanding mortgage, the solution could be found through your pension. The pension freedoms now allow people with defined contribution pensions to access them from age 55.

It is estimated that around 300,000 homeowners aged between 51 and 65 are planning to use pension savings to pay off their mortgages, according to retirement income specialist, Just.

However, only 25% of your pot can be taken tax free – so to clear a larger debt of, say, £100,000, you would need a total pot of £400,000 to avoid paying any tax on your withdrawal. Take more than 25% and you’ll have to pay income tax on anything above that level.

To take your tax-free cash in one go, you would also need to move the rest of your pot into flexi-access drawdown – if you left your pension where it is (accessing your money under uncrystallised fund pension lump sum rules), you would only get the first 25% tax free and would have to pay income tax at your highest rate on the remainder.

Interest-only mortgages

Nearly one in five mortgage customers has an interest-only mortgage, according to the Financial Conduct Authority (FCA), and over the next few years increasing numbers will require repayment.

With an interest-only mortgage, you only pay interest to your lender every month. You don’t pay off any of the capital – the amount you actually borrowed to buy the property – until your mortgage ends. People who take these mortgages have to find a way of paying back the capital by setting up a separate repayment plan.

It was common to pay into an investment called an endowment that was designed to mature at the same time the mortgage runs out and use that to clear the loan. However, many of these endowments failed to deliver the expected returns.

David and Pat Thomas found themselves with a £90,000 shortfall in 2017 when their endowment didn’t provide the cash needed to clear their £80,000 mortgage.

The couple moved into their home in Crawley, West Sussex, 10 years ago to be closer to family. They had no intention of moving, but feared they might need to.

David, 72, who worked in aviation security before his retirement, says: “We tried a few lenders but were turned away because of our age. Luckily, our financial adviser came up with a solution through Family Building Society.”

The couple signed up to a five-year discount rate at 3.34% with a 17-year term.

Nearly one in five customers’ mortgages are on an interest-only basis

Retirement interest-only mortgages

A recent relaxation in rules by the FCA has also enabled lenders to be more flexible when lending to older people.

Unlike conventional mortgages, new ‘retirement interest-only mortgages’ have no fixed end date. Older homeowners are able to make monthly interest payments until they die or go into long-term care, with the capital only being repaid when the property is sold.

Mr Hollingworth says: “The market is still relatively new. However, there’s a growing range of options at lenders, such as Tipton & Coseley Building Society, Bath Building Society and Hodge Lifetime.

The minimum amount of equity you must have in your home is 35%, with The Hanley offering a 1.7% discount for the term, giving it a current rate of 3.74%. Better rates are available if you have 50% equity, with Penrith Building Society leading the way at 2.59% (a 2.16% discount for two years).

Equity release

Another option is equity release: a loan taken against the value of your home and it is becoming increasingly popular among homeowners who cannot otherwise find the money to repay the mortgage.

A total of 38,912 households unlocked some of their property wealth during the first half of 2018 – up 25% from 31,158 in the first half of 2017, according to research from financial services firm One Family.

The same research also shows that 40% of lifetime mortgages are taken to clear an existing mortgage, with loans for this type of customer averaging £110,000.

The most popular kind of equity release is a lifetime mortgage. Like a mainstream mortgage, interest is charged on the amount borrowed. But instead of being repaid each month, it rolls up and is paid off when the property is sold.

Kenny and Fay May took out a lifetime mortgage in August to pay off the £100,000 capital on their interest-only mortgage.

The couple, who live in Wickham Market, Suffolk, had been planning to sell a house they bought for Fay’s mother to repay the bank.

Fay, 58 and a retired resource manager, says: “Mother is still healthy and living at home at the age of 88.

“But this left us worrying about how to pay back our own mortgage. We asked the bank for another loan but it only offered us a repayment mortgage we couldn’t afford.”

A loan taken against the value of your home is becoming more popular

Kenny, 69, a postman due to retire this year, and Fay have a financial adviser who recommended an equity release plan with Premier Equity Release.

The couple paid £42,000 of the mortgage from savings and the rest came through the lifetime mortgage with Premier.

“It means that we no longer have monthly mortgage repayments. When we do come to sell mother’s house, we’ll repay the loan.”

Fay adds: “We’re so relieved that we can enjoy retirement without worrying about money so much.”

It’s important to seek advice if you’re considering equity release. Although you will never owe more than the value of the property, interest charges could potentially wipe out your equity.

Talk to a financial adviser who can help run through the options. Alternatively, One Family has launched a new advice service, covering all lifetime mortgages across the market for a fixed fee of £500.

The good news is there is a record number of equity release deals to choose from. Over the past two years, the number has more than doubled from 58 in August 2016 to 139 in August 2018, according to the Equity Release Council.

Even better, average interest rates have also fallen over the period from 5.76% in 2016 to 5.09% in August 2018, according to comparison site Moneyfacts.

“I pay a high interest rate but hope to remortgage in the future”

Gail Coelho, a 71-year-old former deputy head teacher and grandmother-of-two was hoping to have paid off her mortgage by now. But Gail had to buy out her husband when they divorced 20 years ago. To do so, she took out a new mortgage on a two-bedroom apartment in a listed building in Chester.

She took an interest-only loan, as it was all she could afford at the time. As the end of the mortgage approached, Gail decided it was time to move to a retirement village.

Gail says: “I have always owned property and would feel vulnerable renting at my age. But my bank wouldn’t be able to lend because of my age and the type of flat I wanted to buy – one in a retirement complex.”

Another challenge for Gail was the fact that she has a County Court Judgment (CCJ) on her credit file from credit card she built up when supporting her son when he encountered financial difficulties.

Gail says: “The combination of the three factors meant getting a mortgage seemed impossible. But some friends told me about a lender which had helped them – called Together. I got in touch and sure enough it was able to help. It was such a relief.”

Together approved a 10-year mortgage of £61,000 for the £155,000 flat. Gail signed up to a five-year fixed rate at 7.12%.

Gail adds: “I know the rate is far higher than I would get on the high street, but I didn’t have any other way to buy the home I wanted to live in. And when my CCJ falls away, I hope to remortgage to a retirement interest-only loan.”

How to find a mortgage broker

An independent mortgage broker can help to identify the best mortgage for your needs and access deals that you could not otherwise find.

Crucially, a good broker will know the different lenders and their criteria inside out and can use this knowledge to help with your application.

Different brokers have different charging structures. Some are free, but take commission from lenders; others charge a flat fee of anything from £300 to £600 or a percentage of the loan. Always make sure you understand charges before you go ahead.

Search for a broker in your area using Unbiased.co.uk or Vouchedfor.co.uk.